Activist Hedge Fund Starboard Succeeds in Replacing Darden Board

The fate of Red Lobster figured prominently in the battle over the board of Darden Restaurants.Credit Hiroko Masuike/The New York Times

Updated, 7:40 p.m. |

The activist hedge fund Starboard Value prevailed on Friday in its showdown with the board of Darden Restaurants, the owner of Olive Garden and other restaurant chains, winning shareholder support to replace the entire board.

After its annual meeting in Orlando, Fla., Darden announced that based on a preliminary vote count, shareholders had elected all 12 of Starboard’s nominated directors, a rare repudiation of a full board.

The new directors will include Starboard’s chief executive, Jeffrey C. Smith, and Bradley D. Blum, a former president of Olive Garden.

The resounding victory caps a one-year battle between Darden and a group of disgruntled investors who first called for Darden to create a separate company for its Red Lobster and Olive Garden chains.

Instead, Darden ignored their recommendation and sold Red Lobster for $2.1 billion in May despite shareholder misgivings, resulting in a fierce war of words between the activist investors and Darden. Starboard then announced its plans to unseat the entire board, arguing that Darden’s management had shown “contempt for shareholder interest.”

Starboard captured headlines again last month when it criticized Olive Garden for wasting money by providing customers with unlimited breadsticks.

In a statement later released by the company, Mr. Smith said, “The new board is prepared and excited to immediately begin working alongside Darden’s management team to put Darden on track for long-term value creation for all shareholders.”

The new board members also include the food-industry insiders Jean M. Birch, a former president of IHOP, and Alan N. Stillman, the chief executive and chairman of the Smith & Wollensky Restaurant Group.

Speaking on behalf of Darden’s outgoing directors, Charles A. Ledsinger Jr., the former independent nonexecutive chairman, said, “We give our best wishes to the incoming directors, welcome the reconstituted board and look forward to seeing continued progress at Darden.”

The pleasant formalities were in stark contrast to the acrimonious proxy battle waged by Starboard, which now has an 8.8 percent stake in Darden, and the smaller activist the Barington Capital Group.

What began as an effort to push for change at Darden, which owns brands like LongHorn Steakhouse, Capital Grille, Seasons 52, Yard House, Bahama Breeze and Eddie V’s, developed into a full-blown fight for control of the board.

Late last year, Barington proposed spinning off Olive Garden and Red Lobster into a company separate from Darden’s higher-growth chains. It also urged Darden to consider selling its real estate and leasing it or spinning off those holdings into a publicly traded real estate investment trust.

Darden countered with a proposal to spin off Red Lobster, but not Olive Garden, as a stand-alone company. It was this proposal that prompted the larger activist, Starboard, to echo Barington’s call and object to the spinoff, arguing that the move would sacrifice value by leaving Red Lobster too small to survive while failing to capitalize on its real estate.

In response, a majority of Darden’s shareholders called a special meeting to vote on the spinoff. The company also adopted measures to fight off the activists, including bylaws intended to inhibit shareholder nominations of new directors.

Before the shareholder meeting on the spinoff, Darden’s board abruptly made a deal in May to sell Red Lobster for $2.1 billion to Golden Gate Capital.

The move infuriated shareholders led by Starboard, which immediately embarked on a campaign to try to replace Darden’s directors. James A. Mitarotonda, Barington’s chief executive, called Darden’s move “unconscionable.”

Darden’s own board sought to negotiate with Starboard, offering it four seats on the board and proposing to add four new independent directors, but the damage was done.

Last month, Starboard published a nearly 300-page plan to increase Darden’s earnings, outlining some headline-making criticisms about Olive Garden’s unlimited breadsticks and the way it cooked pasta. “Shockingly, Olive Garden no longer salts the water it uses to boil the pasta, merely to get a longer warranty on its pots,” Starboard wrote, adding that the “appalling decision” resulted in “mushy” offerings.

Starboard’s arguments, which included detailed ways in which Darden could increase its earnings as much as $326 million, resonated with shareholders.

Institutional Shareholder Services, the big proxy advisory firm, and another main proxy adviser, Glass Lewis, took the unusual step of recommending that all of the directors be replaced at the shareholder meeting, lending their support to Starboard.

It is not clear yet who will succeed Darden’s longtime chief executive, Clarence Otis, who stepped down earlier this year.

A version of this article appears in print on 10/11/2014, on page B6 of the NewYork edition with the headline: Activist Hedge Fund Succeeds in Replacing Darden Board.